Going Fee-Based: The 7 Investor Benefits


There are numerous business and investment benefits that an advisor receives from transitioning to a fee-based approach. In fact, though, the most compelling benefits may actually be received by the client. In our mind, a transition to fee-based account structure, that is done properly, can truly be a win-win solution for your business and your clients.

We outline seven benefits that investors should receive when working with a fee-based advisor using a managed account approach:

1. A fiduciary looking out after their best interests

When you earn a fee, you are required to operate under the fiduciary standard of care. The fiduciary standard is a more stringent standard than the suitability standard that is relevant to commissionable transactions.

According to the Center for the Fiduciary Standard, advisors earning a fee have a fiduciary responsibility to investors and are held to legal standards under the Investment Adviser Act of 1940. As a fiduciary, the advisor is legally required to place the client’s interests before the advisor’s, act with prudence, not mislead clients, avoid conflicts of interest and fully disclose any unavoidable conflicts.

The fiduciary standard holds the advisor to the same level of care that doctors and lawyers have to give to their clients. It is truly a more stringent level of care and responsibility that clients benefit from.

2. Greater fee transparency

When you earn a fee, you are required to follow the rules of the fiduciary standard and are obligated to follow SEC reporting guidelines. One of the requirements is to fully disclose how you are paid. Fees need to be clearly stated and presented in a way that investors can understand. These fees are often provided in both your disclosure brochure, typically your ADV Part 2A, and in your client agreement.

When all levels of fees are presented and explained to a client, there is no confusion as to what they are paying for. Additionally, any perceived or actual conflict of interest must be detailed in an advisor’s disclosure brochure.

The requirements of transparency and full-disclosure help investors make more informed decisions about their investments. When investors don’t have to worry about hidden fees or hidden agendas, a long-standing relationship based on trust can be more easily formed.

3. Ongoing monitoring and rebalancing

Over time, different investments come in and out of favor. Monitoring the market cycle and proactively rebalancing client accounts is one way to give clients an added piece of mind that someone is proactively looking after their money.

Additionally, a dynamic approach to rebalancing isn’t just marketing fluff. Depending on how you rebalance, investors may be able to earn up to an additional 0.5% per year from the process as investments are systematically bought low and sold high.

A managed account makes the process of monitoring and rebalancing simple, and, with the right partner, won’t consume much of your time.

4. Professional management & oversight

Mutual fund companies often advertise that they offer investors professional management and oversight. They argue that selecting individual stocks and bonds can be a research-intensive, time-consuming process and that they can potentially do it better since they have dedicated professionals whose sole job it is to find better investments.

The same case can be made for an investor’s total portfolio. An effectively diversified portfolio needs multiple asset classes, so an investor’s portfolio is often comprised of multiple mutual funds. It stands to reason that clients would benefit from professional management and oversight of the overall allocation and selection of all the various mutual funds as well.

It would make sense that investors stand to benefit from multiple layers of professional management and oversight with a fee-based, managed account approach. When you partner with a firm like Bellatore, your clients have the confidence in knowing that a team of dedicated professionals selected their investments using rigorous research and a thorough due diligence process.

5. Greater investment access

Fee-based advisors typically have access to lower cost, institutional share classes. The price difference between an A-share mutual fund and an institutional share mutual fund can be significant. In fact, it could easily account for a portion of your advisory fee.

Yet, many advisors overlook the importance of fees. In a study on mutual fund returns, Morningstar actually found that fees are one of the most important factors when trying to gauge a mutual fund’s future performance. They found that the lower the fee, the more likely a fund was to outperform its peers.

Additionally, fee-based accounts are typically implemented through a third-party custodian. This feature opens an account to a larger universe of investment options without the burden of having to fill out the massive amounts of paperwork that come with the direct to fund approach.

A fee-based account structure gives your clients easier and greater access to a wider range of investment options.

6. More effective diversification

Advisors that invest directly with mutual fund companies often limit the number of different fund companies they use. This is commonly done for a variety of reasons including the amount of paperwork they have to fill out, mutual fund breakpoints and lack of familiarity with other fund companies. Depending on the fund company they use, they could have a high degree of overlap (i.e., different mutual funds hold the same stock or bond) between a client’s holdings.

The use of a third party custodian can make it easier to gain access to more fund companies which could potentially increase the level of diversification and reduce overlap in your clients’ portfolios. Additionally, if you partner with a firm like Bellatore, experts are available to help with the investment selection and ongoing management of your accounts to help you increase the level of diversification in a portfolio.

As Modern Portfolio Theory has proven, a portfolio that is effectively diversified can achieve better results with less risk than an ineffectively diversified portfolio.

7. An advice-based relationship

One of the best enhancements that you will be able to offer your client as a fee-based advisor is more of you. You see, in a fee-based structure, your value changes. You are no longer a salesperson, but now a trusted advisor.

The main reason for the shift is how you interact with clients. A fee-based approach allows you to focus on the client’s wealth and goals. Since you are paid on an ongoing basis, the pressure to sell is removed, thereby freeing you to focus on helping your clients achieve their goals.

This opens the door to a long-term relationship based on advice, trust and alignment of your interests with those of your clients.

Advantage Client

Clients stand to receive very compelling and powerful benefits from a fee-based relationship. This stands in stark contrast to a commission-based relationship where many of these benefits are not feasible or, in some cases, cannot even be offered. At the end of the day, clients gain piece of mind and confidence in knowing that their best interests are being looked out for and that their investments are being taken care of. The advantage is truly the client’s.